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There aren’t many penny shares providing a dividend yield above 5%, however Michelmersh Brick (LSE:MBH) is one in every of them. The AIM-listed brickmaker’s share worth is down 11% yr up to now and 43% since April 2021.
Nonetheless, the promoting might need gone too far, a minimum of in accordance with the 4 Metropolis analysts following the inventory. They’ve a mean share worth goal of 136p — some 54% above the present 88p. What’s extra, all 4 price the inventory as a Sturdy Purchase.
Difficult backdrop
Michelmersh is a premium brick and constructing merchandise producer, working all through the UK and Belgium. It sells over 100 merchandise into various finish markets, together with restore, upkeep and enchancment (RMI), housing, business, city regeneration, and specification. With round 480 acres of land, it has ample clay reserves.
Because the chart exhibits, the share worth has been on a disappointing trajectory since 2021. That is instantly associated to a drop in UK development, which has been hit by greater rates of interest, value inflation, and weaker demand.
In 2024, UK brick consumption was round 1.7bn items, down from 2.5bn in 2022. And market despatch volumes right this moment are nonetheless 25% under 2022 ranges.
Unsurprisingly then, Michelmersh’s enterprise has been underneath strain. In H1, gross margin weakened to 33.6% from 36.2%, partly because of an prolonged shutdown at one in every of its UK manufacturing amenities. Adjusted EBITDA fell 18% to £5.9m, regardless of income rising 1.1% to £35.8m.
Administration warns that the near-term outlook stays murky in each the UK and Belgium. Actually, the corporate’s Belgium operation was briefly shut down in Q3 owing to weak demand.
Valuation and yield
Nonetheless, the excellent news is that the market has stabilised, whereas Michelmersh plans to reopen the Belgium plant in This autumn. As such, it sees 2025 broadly matching final yr’s £71m in income.
Subsequent yr, administration expects a return to progress. That is backed up by present forecasts for £76m in income and a 17% improve in internet revenue (round £8.5m).
Based mostly on this, the penny share is buying and selling at just below 10 instances forecast earnings. As talked about, it’s additionally providing a 5.3% dividend yield, with the potential payout nicely supported by anticipated earnings.
In September, the interim dividend was maintained, indicating confidence within the outlook for the enterprise. And although the brickmaker has dropped a dedication to a progressive dividend, it did this to have the flexibleness to additionally perform share buybacks. In April, it authorised as much as £2m to repurchase its personal inventory.
Supportive traits
Make no mistake, the backdrop for brickmakers stays difficult proper now. However the medium to long run appears far brighter, with greater than 1m new houses set to be constructed within the UK over the subsequent few years. Belgium has additionally acknowledged a must construct many extra houses.
Wanting forward, the federal government has dedicated to decreasing pink tape round planning approvals, whereas new English cities have been proposed. Different components like excessive immigration, the rise of single dwellers, and an ageing inhabitants all level to the necessity for extra homes.
Administration says the enterprise is nicely positioned to make the most of any restoration in development exercise. With the inventory languishing close to a 52-week low, and providing a 5.3% dividend yield, traders would possibly need to take a more in-depth look.
